What are FIFO, LIFO, FEFO and Average methods? This is an explanation of the four methods

What are FIFO, LIFO, FEFO and Average methods This is an explanation of the four methods

Nikereact.orgTalking about business, maybe one of the things that comes to your mind is profit. Yes, this is indeed an important component in a business. However, to get a profit, it is also necessary to have the availability of goods that must be available.

Therefore, a business in any field requires a fairly good stock system. Currently, there are at least four systems for recording the availability of goods or stock of goods. The four inventory recording systems are the FIFO, LIFO, FEFO and Average methods.

If  has been in the business world, perhaps the languages ​​of FIFO, LIFO, FEFO and Average are familiar. However, there are some people who do not really understand some of these stock recording methods.

No need to worry about this, because this article will provide an explanation about FIFO, LIFO, FEFO and Average. Both for those of you who have been in the business world for a long time or are just starting out.

It’s really mandatory to read the explanation in this article related to the FIFO, LIFO, FEFO and Average methods applied to the inventory recording system.

Understanding the FIFO, LIFO, FEFO and Average methods

What are FIFO, LIFO, FEFO and Average methods This is an explanation of the four methods

The previous explanation has touched on a bit about the FIFO, LIFO, FEFO and Average methods. These four methods are so important in recording stock in the business world. Of course, the FIFO, LIFO, FEFO and Average methods have different meanings.

From this understanding, it is hoped that we can learn or know in general what the FIFO, LIFO, FEFO and Average methods are in the business world. Or should the business world have to use the FIFO, LIFO, FEFO and Average methods for the inventory recording process.

Well, maybe at first many were confused and didn’t really know the meaning of the FIFO, LIFO, FEFO and Average methods. Therefore, we start from understanding the notion of the FIFO, LIFO, FEFO and Average methods.

Understanding the FIFO Method

First, there is the FIFO method which is included in one way of recording stock of goods. FIFO also stands for First In First Out. Just as the FIFO method stands for, it is a system that makes an item that enters the first order must come out in the first order as well.

Simply put, the FIFO method is a system that requires that the first item in must also be the first item out. In the business world, the FIFO method is widely used in retail businesses.

For example, businesses in the field of f&b or Food and Beverage such as food shops, cakes and even minimarkets. You are also of course aware that every product sold in these places has a short period of time or expiration. Therefore, these items must be sold quickly.

Understanding the LIFO Method

Next there is the LIFO method which is also included in one of the methods of recording goods. The LIFO method is the opposite of the FIFO method. LIFO stands for Last In First Out.

Where this method will apply a system of selling goods that enter the last order will be sold in the very first order. Then for goods that have existed since the first will be sold at some time later. You could say the LIFO method is easier in the process of arranging goods.

Interestingly, the LIFO method also provides its own advantages for business owners. This is because the LIFO method can save on the process of tax expenditure when inflation occurs. It should be noted that when there is an inflation, the profit earned will decrease but will not have an effect on the profit of the operations carried out.

For example, a business actor in the field of selling clothes. The process of selling clothes will be carried out as an ongoing trend. This means that even though the clothes that go into stock are the last order. It will still be sold because market demand is rising.

This will also increase the profits received by business actors selling these clothes.

Then what about the stock of goods that are not trending? So the action taken is to keep back in the warehouse and resell it when it’s a trend.

Understanding the FEFO Method

The FEFO method is also a method of recording goods. FEFO itself is an acronym for First Expired First Out. From the abbreviation, it can have a broader meaning, namely the goods or products that have the fastest expiration date will be sold first.

In this FEFO method, business owners do not need to think about the order in which goods come in for sale. However, business actors will pay attention to the expiration date of the product.

So even though there are new products coming in, the expiration date is close. Then the product will be sold first. The existence of the FEFO method is claimed to be able to reduce the number of losses from the ongoing business.

An example is the sales system in pharmacies. Pharmacy business actors will sell drug products according to the expiration date. The medicinal products with the closest expiry date will be sold first.

One of the methods used to apply the FEFO method to the pharmacy business is to place the drug product with the closest expiration date at the front of the storefront. The hope is that potential buyers know the drug product.

Average method

Compared to the three methods above, the Average method is quite complicated. The application of the Average method is to obtain the results of unit cost calculations in the inventory section.

Then to get these results, it is done by dividing all the units in the warehouse by the availability of units to be sold. Later the result obtained is an average cost of the product to be sold.

Now that’s an explanation related to the understanding of the FIFO, LIFO, FEFO and Average methods. The four methods have different meanings. In addition, each method also has its own advantages and functions. Then what methods do you apply in your personal business?

Advantages of FIFO, LIFO, FEFO and Average Methods

Now after knowing the meaning of the FIFO, LIFO, FEFO and Average methods. Of course, it’s not complete if you only know what the FIFO, LIFO, FEFO and Average methods mean. You also need to know the advantages of some of these methods.

Be it the FIFO, LIFO, FEFO and Average methods always have their respective advantages. Of course, by understanding the advantages of each stock method, you will also understand the best stock method to apply to the type of business you are running.

So that you understand better what are the advantages of the FIFO, LIFO, FEFO and Average methods. The following is a full explanation regarding this matter.

Advantages of the FIFO Method

First, we will start with the advantages of the FIFO method. Even if it’s only a few points. However, the explanation below will be quite helpful in knowing in general what the FIFO method can provide when applied to a business perspective.

  • The process of recording the goods report will be the same as the data on the goods in the warehouse.
  • The FIFO method is also able to make the HPP or cost of goods sold which is quite low occur. However, in terms of gross profit, the results will be quite high.
  • The FIFO method is also more profitable, logical and also claimed to be very reliable.
  • The FIFO method is able to suppress the decline in the quality of goods.
  • The process of applying the FIFO method is easier to understand.
  • Financial reports using the FIFO method will also minimize manipulation.

Advantages of the LIFO Method

After understanding what are the advantages of the FIFO method. So at this point we will proceed to an explanation of the advantages of applying the LIFO method to stock goods. So that you will also understand more quickly, the following is an explanation of the advantages of the LIFO method.

  1. The process of arranging goods with the LIFO method system will be easier.
  2. Expenditure in terms of taxes will be more controlled and also efficient.
  3. The possibility of getting a profit can be greater. This is because the LIFO method takes advantage of what is trending at the same time.
  4. The process of comparing the amount of costs or costs with the income generated is fairly easy.
  5. Although there is a possibility of inflation, operating profit income will not affect this condition.

Advantages of the FEFO Method

This third point will provide an explanation of the advantages of the FEFO method. The FEFO method is also often applied in the business field. Just like the previous two points, the FEFO method also has several advantages.

  1. The FEFO method is claimed to reduce the possibility of losses to the company.
  2. The existence of the FEFO method is also able to reduce the occurrence of product stock storage that has passed the expiration date.’

Advantages of the Average Method

Lastly there is the Average method which also has its advantages. Although not as much as the advantages of the previous method. However, the Average method can also help the continuity of business processes. Below are some explanations related to the advantages of the Average method.

  1. The existence of the Average method will also make it easier to get the value of the items inside without having to worry about the time of entry.
  2. Companies are able to provide goods or products that are in the warehouse without the need to think about which one enters first.

Those are some of the advantages possessed by some of these methods. After knowing some of the advantages of the FIFO, LIFO, FEFO and Average methods, of course, it will also make it easier for you to choose the method of recording stock for the business you are in.

Disadvantages of FIFO, LIFO, FEFO and Average methods

Although the FIFO, LIFO, FEFO and Average methods have their respective advantages. However, a system also has its drawbacks. Well maybe some of you also don’t really know what are the shortcomings of the FIFO, LIFO, FEFO and Average methods.

The explanation below can help you to provide an explanation related to some of the shortcomings of the FIFO, LIFO, FEFO and Average methods.

Disadvantages of FIFO Method

The first explanation will start from the shortcomings of the FIFO method. Here is the explanation.

  1. The application of the FIFO method allows companies to pay a higher tax burden to the government.
  2. The FIFO method is indeed able to provide its own profit. However, the calculation and earnings are somewhat less accurate.
  3. The difference between the capital used for production and the profit generated is quite large.

Disadvantages of the LIFO Method

Next is about the drawbacks of the LIFO method. The following is an explanation of the disadvantages of the LIFO method.

  1. The process of recording goods is somewhat more complicated. This is because the LIFO method is more opposite to the inflow and outflow of goods storage inventory.
  2. The LIFO method is somewhat more complicated, this makes the bookkeeping costs higher.
  3. Although able to provide a profit on sales. However, the sales profit from the application of the LIFO method is relatively low.

Disadvantages of the FEFO Method

Next are the disadvantages of the FEFO method. Similar to the previous two methods, the FEFO method also has its own drawbacks. Below are some of the disadvantages of the FEFO method.

  1. It takes more time because every day you have to look for products with the fastest expiration among hundreds or thousands of products to be sold.
  2. The level of accuracy is getting higher because the goods sold are more than tens.
  3. Requires more than one worker to apply the FEFO method to inventory recording.

Disadvantages of the Average Method

The last is the drawback of the Average method. Below is an explanation of the disadvantages of the Average method.

  1. Although it can generate profits from the sales process. However, the application of the Average method is only able to generate profits with small or little conditions.
  2. Compared to the three previous methods, the Average method is the most complex in terms of levels.

So, those are some of the disadvantages of the FIFO, LIFO, FEFO and Average methods. Although it has drawbacks in each method. But still if you look at the advantages provided. The FIFO, LIFO, FEFO and Average methods can still be used for recording stock of goods.

Examples of Application of FIFO, LIFO, FEFO and Average Methods

After knowing how to understand, the advantages and disadvantages of the FIFO, LIFO, FEFO and Average methods. It’s still lacking if you don’t know examples of the application of the FIFO, LIFO, FEFO and Average methods in a business field.

Because not all business fields are suitable for using a stock recording system such as the FIFO, LIFO, FEFO and Average methods. So that you are not getting curious about examples of the application of the FIFO, LIFO, FEFO and Average methods. Here is an explanation of this.

Examples of Application of the FIFO Method

Food companies will usually implement a system of recording goods with the FIFO method. An example is the sale of bread, of course you also know that bakery products have a very fast expiration date.

Examples of Application of the LIFO Method

Most of the application of the LIFO method is in the clothing sales business. However, some businesses in the sale of electronic goods and books also apply the LIFO method of stock recording.

Example of Application of FEFO Method

Companies in the pharmaceutical sector are one example of the application of the FEFO method as a goods recording system. Then companies that sell food and beverages will also implement a system of recording goods with the FEFO method.

Example of Application of the Average Method

Then for an example of applying the Average method as a system for recording goods, it is in a business field that does not have an expiration date on its product. Some of them are like companies that sell furniture, stationery, building materials and so on.

Those are some explanations about the FIFO, LIFO, FEFO and Average methods. The explanation above can help you to choose the most suitable stock recording method for the line of business you are running.

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